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Financial Institution Letters


[Federal Register: December 28, 1994]


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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 337

RIN 3064-AB50

 
Unsafe and Unsound Banking Practices

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Final rule.

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SUMMARY: The Board of Directors of the Federal Deposit Insurance 
Corporation is amending its regulations to except loans which are fully 
secured by certain types of collateral from the general limit on 
``other purpose'' loans to executive officers of insured nonmember 
banks. The amendment parallels changes by the Board of Governors of the 
Federal Reserve System to that agency's regulations on insider loans.

EFFECTIVE DATE: December 28, 1994.

FOR FURTHER INFORMATION CONTACT: Mark Mellon, Senior Attorney, 
Regulation and Legislation Section, Legal Division, (202) 898-3854, or 
Michael D. Jenkins, Examination Specialist, Division of Supervision, 
(202) 898-6896, Federal Deposit Insurance Corporation, 550 17th Street, 
NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. The Proposed Rule

    On August 16, 1994, the FDIC published for public comment a 
proposed revision to 12 CFR 337.3 concerning limits on extensions of 
credit to executive officers. 59 FR 41990 (August 16, 1994). The 
proposed rule sought to ease the restrictions on extensions of credit 
by insured nonmember banks to executive officers by creating an 
additional exception to the general limit on ``other purpose'' loans to 
executive officers.1 This exception is for loans which are fully 
secured by the following types of collateral:
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    \1\ The other purpose lending limit is currently 2.5 percent of 
the bank's capital and unimpaired surplus but in no event more than 
$100,000; see 12 CFR 337.3(c)(2).
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    (a) A perfected security interest in bonds, notes, certificates of 
indebtedness, or Treasury bills of the United States or in other such 
obligations fully guaranteed as to principal and interest by the United 
States;
    (b) Unconditional takeout commitments or guarantees of any 
department, agency, bureau, board, commission or establishment of the 
United States or any corporation wholly owned directly or indirectly by 
the United States; or
    (c) A perfected security interest in a segregated deposit account 
in the lending bank.
    This exception will be in addition to the statutory exceptions to 
the other purpose lending limit for home mortgage loans and education 
loans.
    Section 337.3 currently provides that, with certain exceptions, 
insured nonmember banks are subject to the restrictions contained in 
Subpart A of 12 CFR Part 215 (Regulation O). 12 CFR 337.3(a). One of 
these exceptions, 12 CFR 215.5(c)(3), sets out the amount of extensions 
of credit which may be made to an executive officer for purposes other 
than those specifically authorized by section 22(g) of the Federal 
Reserve Act (FRA) (12 U.S.C. 375a) (other purpose loans). Section 
22(g)(4) provides that the lending limit on other purpose loans must be 
set by the appropriate federal banking agency. With respect to insured 
nonmember banks, the appropriate federal banking agency is the FDIC. 
Section 337.3 must therefore specifically set out the limit on other 
purpose loans for insured nonmember banks, and any exceptions thereto.
    Recently the Board of Governors of the Federal Reserve System made 
changes to Federal Reserve Board Regulation O. 59 FR 8831 (February 24, 
1994). Most of these changes were immediately applicable to insured 
nonmember banks. The changes, however, to Sec. 215.5(c)(3) which 
provide that a loan may be made by a member bank to one of its 
executive officers in any amount if it has been secured by certain 
types of collateral (the same types proposed by the FDIC which are 
described above) can only be made available to insured nonmember banks 
if Sec. 337.3 is amended. As indicated above, the FDIC proposed doing 
so on August 16, 1994. The Board of Governors of the Federal Reserve 
System also concurrently redesignated the provision which sets forth 
the limit for other purpose loans by member banks to their executive 
officers as 12 CFR 215.5(c)(4). 59 FR at 8840-8841. The FDIC therefore 
also proposed to amend Sec. 337.3 to cross-reference Sec. 215.5(c)(4) 
as one of the provisions of Regulation O that is inapplicable to 
insured nonmember banks.

II. Comments on the Proposed Rule

    The FDIC received a total of 31 comment letters in response to its 
proposal. Five letters were from state or national trade associations 
representing depository institutions, two letters were from bank 
holding companies, one letter was from a state bank regulator, and the 
remaining 23 letters were from insured nonmember banks. All of the 
commenters supported the proposed revisions.

Recommended Substantive Amendments

    Thirteen commenters went beyond expressions of support for the 
proposed amendment to recommend that the FDIC consider and implement 
additional exceptions to further loosen the restrictions on extensions 
of credit by insured nonmember banks to their executive officers. Seven 
commenters recommended that, in addition to the types of secured loans 
which were specified by the FDIC in its proposal, other categories of 
secured loans should be exempted from the general limit on other 
purpose loans. The recommendations for exemption included loans secured 
by marketable securities, real estate, or cash value life insurance 
policies.
    Two commenters recommended that the $100,000 limit on other purpose 
loans should be adjusted to reflect inflation. Another commenter stated 
that the $100,000 limit should be eliminated altogether and that banks 
should instead be allowed to lend up to 2.5 percent of their capital 
and unimpaired surplus to executive officers for other purpose loans. 
Two other commenters stated that the FDIC should permit loans in any 
amount for any purpose to an executive officer provided the loans are 
secured by the executive officer's principal residence. One commenter 
who made this recommendation also stated that home equity lines of 
credit which are adequately collateralized by the executive officer's 
primary residence should be exempted from the other purpose loan limit 
and should be exempted from the acceleration requirement set forth in 
Sec. 215.5(d)(4) of Regulation O.2 One commenter stated that 
unsecured personal loans for up to $5,000 should be excepted from the 
definition of ``extension of credit''. Another suggested that executive 
officers should be allowed to take out a second mortgage on their 
primary residence of up to $100,000.
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    \2\ Section 215.5(d)(4) provides that any extension of credit by 
a bank to an executive officer will be subject to the condition in 
writing that the extension of credit will, at the option of the 
bank, become due and payable at any time that the officer is 
indebted to any other bank or banks in an aggregate amount greater 
than $100,000.
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    One commenter noted that community banks have experienced problems 
in justifying the terms and interest rates of loans to their insiders. 
The commenter contended that fear of criticism by examiners frequently 
leads banks to charge higher rates to insiders and that problems arise 
for small banks when they do not have ``comparable'' loans within the 
bank to compare to their insider loans.3 The commenter argued that 
in small communities where the executive officer is often the most 
creditworthy individual in the community and therefore likely to 
qualify for the most favorable terms, the bank will often have no other 
loans to compare to the insider loan. The commenter requested that 
banks be allowed in such situations to look to offers of credit to 
their executive officers from other depository institutions and their 
terms and procedures as a substitute for comparable transactions by the 
bank.
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    \3\ Section 215.4(a) of Regulation O states that a loan offer 
from a bank to its executive officer or director must be made on 
substantially the same terms as and follow the same procedures that 
prevail with comparable transactions by the bank with persons not 
associated with the bank.
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    Two commenters stated generally that executive officers should have 
the same loan opportunities that insured nonmember banks provide for 
their non-insider customers. One requested that banks be allowed to 
make the same loans to an executive officer that they make for any 
other customer as long as the executive officer owns less than fifty 
percent of the bank and the institution has a return on assets of one 
percent or more. The other commenter suggested that regulators might 
rely on two independent appraisals of non-cash property pledged by 
executive officers and directors as security for a loan to ensure 
against abuse by insiders.
    The FDIC welcomes suggestions that will reduce the regulatory 
burden on depository institutions without affecting their safety and 
soundness. Some of the suggested amendments, however, would require 
amendments to Regulation O by the Board of Governors of the Federal 
Reserve System. Other requested changes would require amendments by 
Congress to sections 22(g) and (h) of the FRA. While those suggested 
changes to the restrictions on insider lending requirements which are 
within the authority of the FDIC deserve consideration, the FDIC does 
not think that it would be appropriate to make such changes 
unilaterally.
    As previously indicated, the FDIC proposed the same exceptions to 
the limit for other purpose loans to executive officers that the Board 
of Governors of the Federal Reserve System promulgated for member 
banks. The proposal was undertaken in order to put insured state 
nonmember banks on an equal footing with state member banks, thus 
avoiding disparity of treatment among banks based upon their 
membership, or lack of membership, in the Federal Reserve System. 
Unilateral adoption by the FDIC of any of the proposed changes would 
result in such disparity of treatment.
    Unilateral adoption of the proposed substantive amendments might 
also interfere with a recent directive from Congress to the federal 
banking agencies. Section 303 of the Riegle Community Development and 
Regulatory Improvement Act of 1994 (Pub. L. 103-325, 108 Stat. 2160) 
provides that the federal banking agencies must streamline their 
regulations, reduce unnecessary costs, and eliminate unwarranted 
constraints on credit availability. The federal banking agencies are 
also directed to work jointly to make regulations uniform that 
implement common statutory or supervisory policies. Unilateral adoption 
by the FDIC of the suggested substantive amendments would be 
inconsistent with this statutory directive to make regulations uniform.
    For these reasons, the Board of Directors of the FDIC declines to 
adopt any of the suggested substantive amendments at this time. Such 
proposed amendments are best considered through an interagency 
initiative to revise insider lending restrictions. As noted previously, 
the FDIC will be coordinating with the other federal banking agencies 
for purposes of streamlining its regulations and to eliminate 
unwarranted constraints on credit availability. Regulation O and 12 CFR 
337.3 will be subject to review and possible amendment as part of that 
project. The FDIC will recommend at that time that the federal banking 
agencies consider those suggested substantive amendments which are 
within the regulatory authority of the federal banking agencies.

Recommended Procedural Amendment

    In addition to the suggested substantive changes, one commenter 
recommended that the FDIC make Regulation O applicable to insured 
nonmember banks by cross-reference to Regulation O rather than through 
its own separately promulgated regulation. The commenter argued that 
this change would lessen confusion as to the applicability of 
amendments by the Board of Governors of the Federal Reserve System to 
Regulation O to insured nonmember banks.
    The FDIC is not able to take this step, however. Under section 
22(g)(4) of the FRA, the lending limit for other purpose loans to 
executive officers must be set by the ``appropriate federal banking 
agency''. In addition, section 7(k) of the Federal Deposit Insurance 
Act (12 U.S.C. 1817(k)) directs the appropriate federal banking agency 
to issue rules and regulations to require the reporting and public 
disclosure of loans made by depository institutions to their executive 
officers and principal shareholders. The FDIC interprets these 
statutory provisions to mean that each federal banking agency must 
independently implement these requirements for the institutions which 
are subject to its supervision.4 Incorporation of insider lending 
requirements for insured nonmember banks by cross-reference to 
Regulation O therefore would not fulfill the statutory mandates which 
Congress has imposed upon the FDIC, particularly since any subsequent 
amendment by the Board of Governors of the Federal Reserve System would 
then have the effect of ``automatically'' amending the FDIC's rule.
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    \4\ The other purpose lending limit for insured nonmember banks 
is established by the FDIC at Sec. 337.3(c)(2). Regulations setting 
forth insider loan disclosure requirements for nonmember banks are 
found at part 349 of the FDIC's regulations (12 CFR Part 349).
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III. The Final Rule

    After considering the comments received, the Board of Directors of 
the FDIC has decided to adopt the proposed rule to amend 12 CFR 337.3 
without change. The Board of Directors of the FDIC has decided, in 
agreement with the conclusion of the Board of Governors of the Federal 
Reserve System, that extensions of credit to an executive officer pose 
minimal risk of loss to a bank when they are secured by the types of 
collateral described above. 59 FR at 8836. The Board of Directors is of 
the opinion that it is consistent with safe and sound banking practices 
to increase the amount of credit that a bank may extend to its 
executive officers when the credit is secured as described above. The 
Board of Directors has also taken into consideration the fact that the 
proposed rule parallels the changes to Regulation O which have already 
been promulgated by the Board of Governors of the Federal Reserve 
System and the fact that all of the comments pertaining to the proposed 
rule were in favor of the proposed changes.

IV. Effective Date

    The rule will become effective immediately upon publication in the 
Federal Register. The necessity for a 30-day delay in effective date 
has been waived since this rule relieves a restriction. 5 U.S.C. 
553(d)(1).

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act, 5 
U.S.C. 605(b), the FDIC hereby certifies that the proposed rule will 
not have a significant economic impact on a substantial number of small 
entities. The rule will not impose burdens on depository institutions 
of any size and will not have the type of economic impact addressed by 
the Regulatory Flexibility Act.
    The FDIC has reached this conclusion because the effect of the rule 
will be to reduce the regulatory requirements that are imposed upon 
small depository institutions rather than to increase them. Small 
depository institutions will have greater freedom of action to extend 
credit to executive officers as a result of the proposed rule rather 
than less.

VI. Paperwork Reduction Act and Regulatory Burden

    No additional collections of information pursuant to section 
3504(h) of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.) are 
contained in the proposed rule. Consequently, no information has been 
submitted to the Office of Management and Budget for review.
    Section 302 of the Regulatory Improvement Act provides that the 
federal banking agencies must consider the administrative burdens and 
benefits of any new regulations that impose additional requirements on 
insured depository institutions. Section 302 also requires that any 
regulations which impose additional reporting, disclosure, or other 
requirements on insured depository institutions shall take effect on 
the first day of a calendar quarter which begins on or after the date 
on which the regulations are published in final form.
    The Board of Directors of the FDIC has concluded that the final 
amendment to 12 CFR 337.3 does not impose additional reporting, 
disclosure or other requirements on insured nonmember banks. This is 
because the effect of the amendment is to create an exception to the 
limits on insider loans by such institutions rather than to impose 
additional restrictions. We have therefore concluded that section 302 
of the Regulatory Improvement Act does not require that the effective 
date of these amendments be on the first day of the calendar quarter 
which begins on or after the date of publication of the final 
amendments.

List of Subjects in 12 CFR Part 337

    Banks, Banking, Reporting and recordkeeping requirements, 
Securities.

    In consideration of the foregoing, the Board of Directors amends 
Part 337 of Chapter III of title 12 of the Code of Federal Regulations 
as follows:

PART 337--[AMENDED]

    1. The authority citation for Part 337 continues to read as 
follows:

    Authority: 12 U.S.C. 375a(4), 375b, 1816, 1818(a), 1818(b), 
1819, 1821(f), 1828(j)(2), 1831f, 1831f-1.

    2. Section 337.3 is amended by revising paragraphs (a) and (c)(2) 
to read as follows:


Sec. 337.3  Limits on extensions of credit to executive officers, 
directors, and principal shareholders of insured nonmember banks.

    (a) With the exception of 12 CFR 215.5(b), 215.5(c)(3), 
215.5(c)(4), and 215.11, insured nonmember banks are subject to the 
restrictions contained in subpart A of Federal Reserve Board Regulation 
O (12 CFR Part 215, subpart A) to the same extent and to the same 
manner as though they were member banks.
* * * * *
    (c) * * *
    (2) An insured nonmember bank is authorized to extend credit to any 
executive officer of the bank for any other purpose not specified in 
Sec. 215.5(c)(1) and (2) of Federal Reserve Board Regulation O (12 CFR 
215.5(c)(1) and (2)) if the aggregate amount of such other extensions 
of credit does not exceed at any one time the higher of 2.5 percent of 
the bank's capital and unimpaired surplus or $25,000 but in no event 
more than $100,000, provided, however, that no such extension of credit 
shall be subject to this limit if the extension of credit is secured 
by:
    (i) A perfected security interest in bonds, notes, certificates of 
indebtedness, or Treasury bills of the United States or in other such 
obligations fully guaranteed as to principal and interest by the United 
States;
    (ii) Unconditional takeout commitments or guarantees of any 
department, agency, bureau, board, commission or establishment of the 
United States or any corporation wholly owned directly or indirectly by 
the United States; or
    (iii) A perfected security interest in a segregated deposit account 
in the lending bank.
* * * * *
    By order of the Board of Directors.

    Dated at Washington, D.C., this 20th day of December 1994.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary
[FR Doc. 94-31706 Filed 12-27-94; 8:45 am]
BILLING CODE 6714-01-P
Last Updated 07/17/1999 communications@fdic.gov